The property/casualty insurance industry has historically experienced market cycles in which pricing was more or less competitive. However, because casualty claims emerge over time, the industry does not always recognize inadequate pricing until losses emerge and as a result companies have less capital to deploy. The 1990's was a period of particularly intense price competition. Significant industry losses began to emerge in 1998 and throughout 1999. By 2000, price increases and tighter contract terms were widespread as companies reacted to the volume of claims emerging from earlier in the decade and from asbestos and environmental exposures written prior to 1987.

The excess and surplus lines market generally provides coverage for risks that do not fit the underwriting criteria of standard carriers. Since 2001, it is believed that more conservative risk selection in the standard market has caused a significant volume of premium to move from the standard market to the excess and surplus lines market. According to data published by A.M. Best, direct premiums written in the excess and surplus lines market grew by 61.7% to $25.6 billion in 2002 and 28.3% to $32.8 billion in 2003. These totals represent 6.3% and 7.2% of the direct written premiums by the United States property/casualty insurance industry in 2002 and 2003, respectively. Based on data compiled by A.M. Best for the five years ended December 31, 2003, the excess and surplus lines sector had an average combined ratio of 96.8% compared to an average combined ratio of 107.9% for the United States property/casualty insurance industry.

Workers' compensation insurance provides insurance for employers who are statutorily mandated to provide benefits to employees if they are injured in the course of their employment. Workers' compensation was the fourth largest property/casualty insurance line in the United States in 2003, according to A.M. Best, with direct written premiums of approximately $48.3 billion. Volume in the workers' compensation insurance industry increased 14% in 2003 compared to 2002.

Excess and surplus lines insurance focuses on insureds who generally cannot purchase insurance from standard lines insurers due typically to perceived risk related to their businesses. The subsidiary under the Company’s name underwrites property/casualty insurance on an excess and surplus lines basis in 48 states and the District of Columbia.

The Company’s subsidiary underwriting is organized in ten underwriting divisions, each of which focuses on a specific industry group or coverage. The Company’s subsidiary writes insurance on both an occurrence form and a claims made and reported form. A policy written on an occurrence form provides coverage to the insured for all losses that were incurred during the coverage period, regardless of when the loss is reported. A policy written on a claims made and reported form provides coverage to the insured only for losses incurred during the coverage period and only if the claim was made and reported to the Company during a specified reporting period.

Workers' compensation insurance provides coverage to employers to compensate for employees' medical costs, lost wages, vocational rehabilitation and death benefits for work related injuries or illness. The benefits payments and the duration of such benefits are set by statute and vary with the nature and severity of the injury or disease and the wages, occupation and age of the employee. The Company’s Workers' Compensation Insurance segment provides workers' compensation insurance to narrowly-defined, high hazard employers.

The Workers' Compensation Insurance segment reflects the operations of the Company’s other subsidiary, Stonewood Insurance. Stonewood Insurance writes workers' compensation insurance for construction industry accounts in North Carolina with a focus on residential construction. Additionally, Stonewood Insurance provides workers' compensation insurance to selected commercial construction and light manufacturing accounts in North Carolina. For 2004, approximately 98% of Stonewood Insurance's direct written premiums were from customers in the residential construction industry. Examples of the types of risks written by Stonewood Insurance include: carpentry, electrical, painting, excavation, masonry, wallboard, plumbing and roofing.

Total revenues increased 1,332% from $5.6 million for the year ended December 31, 2003 to $79.5 million for the year ended December 31, 2004.

Net written premiums were $120.2 million for the year ended December 31, 2004, a 338% increase compared to $27.4 million for the year ended December 31, 2003.

Net investment income for the year ended December 31, 2004 was $3.6 million, up 791% from $407,000 for the year ended December 31, 2003.

Total expenses for the year ended December 31, 2004 were $69.1 million, up 543% from total expenses incurred for the year ended December 31, 2003 of $10.7 million.